I 

112TH CONGRESS 

1ST SESSION H. R. 1635 

To amend the Internal Revenue Code of 1986 to provide special rules for 

investments lost in a fraudulent Ponzi-type scheme. 

IN THE HOUSE OF REPRESENTATIVES 

APRIL 15, 2011 

Mr. PASCRELL (for himself, Mr. BOUSTANY, Ms. BERKLEY, Mr. GARRETT, 

Mrs. MALONEY, Mr. KING of New York, Mr. ROTHMAN of New Jersey, 

Mr. ROONEY, Ms. SCHWARTZ, Ms. ROS-LEHTINEN, Mr. WEINER, and 

Mr. SESSIONS) introduced the following bill; which was referred to the 

Committee on Ways and Means 

A BILL 

To amend the Internal Revenue Code of 1986 to provide 

special rules for investments lost in a fraudulent Ponzitype scheme. 

1 Be it enacted by the Senate and House of Representa2 tives of the United States of America in Congress assembled, 

3 SECTION 1. SHORT TITLE. 

4 This Act may be cited as the ‘‘Ponzi Scheme Victims’ 

5 Tax Relief Act of 2011’’. 


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1 SEC. 2. LOSS TREATMENT OF INVESTMENT LOSSES IN 

2 FRAUDULENT PONZI-TYPE SCHEME. 

3 (a) IN GENERAL.—Section 165 of the Internal Rev4 enue Code of 1986 is amended by redesignating subsection 

5 (m) as subsection (n) and by inserting after subsection 

6 (l) the following new subsection: 

7 ‘‘(m) SPECIAL RULES FOR QUALIFIED FRAUDULENT

8 INVESTMENT LOSSES IN INDIVIDUAL RETIREMENT AC9 COUNTS.— 

10 ‘‘(1) IN GENERAL.—If— 

11 ‘‘(A) a taxpayer has qualified fraudulent 

12 investment loss, and 

13 ‘‘(B) the amount of such loss (without tak14 ing into account any potential recoveries) can 

15 reasonably be estimated as of the close of the 

16 taxable year, 

17 then the taxpayer may elect to treat the amount so 

18 estimated as a theft loss described in subsection 

19 (c)(2) incurred during the taxable year. 

20 ‘‘(2) SPECIAL RULE FOR INDIVIDUAL RETIRE21 MENT PLANS.—In the case of any qualified fraudu22 lent investment loss in connection with assets held in 

23 an individual retirement plan, the beneficiary of such 

24 plan shall be allowed a deduction with respect to 

25 such loss in an amount equal to the lesser of— 

26 ‘‘(A) the greater of— 


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1 ‘‘(i) the sum of the amount of con2 tributions to such individual retirement 

3 plan by such beneficiary plus the amount 

4 of contributions to such individual retire5 ment plan by such beneficiary’s employer 

6 on behalf of such beneficiary, or 

7 ‘‘(ii) 60 percent of the excess of— 

8 ‘‘(I) the value of the assets held 

9 by such beneficiary in such individual 

10 retirement plan, as reported imme11 diately before such loss was discov12 ered, over 

13 ‘‘(II) the sum of value of the as14 sets held by such beneficiary in such 

15 individual retirement plan imme16 diately after such loss was discovered, 

17 or 

18 ‘‘(B) $2,000,000. 

19 ‘‘(3) QUALIFIED FRAUDULENT INVESTMENT

20 LOSS.—For purposes of this subsection— 

21 ‘‘(A) IN GENERAL.—The term ‘qualified 

22 fraudulent investment loss’ means a loss discov23 ered in 2008 or 2009 resulting from a specified 

24 fraudulent arrangement in which, as a result of 

25 the conduct that caused the loss— 


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1 ‘‘(i) a person described in subpara2 graph (B) was charged under State or 

3 Federal law with the commission of fraud, 

4 embezzlement, or similar crime which, if 

5 proven, would constitute a theft (within the 

6 meaning of subsection (c)(3)), or 

7 ‘‘(ii) a person described in subpara8 graph (B) was the subject of a State or 

9 Federal criminal complaint (not withdrawn 

10 or dismissed) alleging the commission of 

11 fraud, embezzlement, or similar crime 

12 which, if proven, would constitute a theft 

13 (within the meaning of subsection (c)(3)), 

14 and either— 

15 ‘‘(I) the complaint alleged an ad16 mission by such person or the execu17 tion of an affidavit by such person ad18 mitting the crime, or 

19 ‘‘(II) a receiver or trustee was 

20 appointed with respect to the arrange21 ment or assets of the arrangement 

22 were frozen. 

23 ‘‘(B) SPECIFIED FRAUDULENT ARRANGE24 MENT.—The term ‘specified fraudulent arVerDate Mar 15 2010 22:27 Apr 21, 2011 Jkt 099200 PO 00000 Frm 00004 Fmt 6652 Sfmt 6201 E:\BILLS\H1635.IH H1635

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1 rangement’ means an arrangement in which a 

2 person— 

3 ‘‘(i) receives cash or property from in4 vestors, 

5 ‘‘(ii) purports to earn income for in6 vestors, 

7 ‘‘(iii) reports income amounts to the 

8 investors that are partially or wholly ficti9 tious, 

10 ‘‘(iv) makes payments, if any, of 

11 purposed income or principal to some in12 vestors from amounts that other investors 

13 invested in the fraudulent arrangement, 

14 and 

15 ‘‘(v) appropriates some or all of the 

16 investors’ cash or property. 

17 ‘‘(4) REGULATIONS.—The Secretary shall issue 

18 such regulations or other guidance as may be nec19 essary or appropriate to carry out this subsection, 

20 including to prevent fraud and abuse under this sub21 section.’’. 

22 (b) EFFECTIVE DATE.—The amendments made by 

23 this section shall apply to taxable years beginning after 

24 December 31, 2007. 


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1 SEC. 3. EXTENSION OF NET OPERATING LOSS CARRYBACK 

2 PERIOD. 

3 (a) IN GENERAL.—Paragraph (1) of section 172(b) 

4 of the Internal Revenue Code of 1986 is amended by add5 ing at the end the following new subparagraph: 

6 ‘‘(K) LOSSES ATTRIBUTABLE TO INVEST7 MENTS IN FRAUDULENT SCHEMES.— 

8 ‘‘(i) IN GENERAL.—In the case of the 

9 portion of a net operating loss which is a 

10 qualified fraudulent investment loss (as de11 fined in section 165(m)(3)) with respect to 

12 which the taxpayer has elected the applica13 tion of this subparagraph— 

14 ‘‘(I) subparagraph (A)(i) shall be 

15 applied by substituting ‘the applicable 

16 number of taxable years’ for ‘2 tax17 able years’ with respect to the portion 

18 of the net operating loss for the tax19 able year which is a qualified fraudu20 lent investment loss, and 

21 ‘‘(II) subparagraphs (F) and (H) 

22 shall not apply with respect to any 

23 qualified fraudulent investment loss. 

24 ‘‘(ii) APPLICABLE NUMBER OF TAX25 ABLE YEARS.—For purposes of clause (i), 

26 the applicable number of taxable years is 


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1 any whole number elected by the taxpayer 

2 which is more than 2 but not more than 

3 10 years. 

4 ‘‘(iii) SPECIAL RULE FOR DECEASED

5 SPOUSES.—If an individual was included 

6 on a joint return of a taxpayer for a tax7 able year to which a qualified fraudulent 

8 investment loss (as so defined) is carried 

9 back under this subparagraph and such in10 dividual has died before the beginning of 

11 the taxable year in which such qualified 

12 fraudulent investment loss arises, then 

13 such qualified fraudulent investment loss 

14 shall be treated as a loss with respect to 

15 both the taxpayer and such individual with 

16 respect to the taxable year to which such 

17 loss carried. 

18 ‘‘(iv) COORDINATION WITH PARA19 GRAPH (2).—For purposes of applying 

20 paragraph (2), a loss to which an election 

21 under section 165(m) applies for any tax22 able year shall be treated in a manner 

23 similar to the manner in which a specified 

24 liability loss is treated.’’. 

25 (b) EFFECTIVE DATE.— 


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1 (1) IN GENERAL.—Except as provided in para2 graph (2), the amendments made by this section 

3 shall apply to net operating losses arising in taxable 

4 years beginning after December 31, 2007. 

5 (2) TRANSITION RULE.—In the case of a net 

6 operating loss for a taxable year ending before the 

7 date of the enactment of this Act— 

8 (A) any election made under subsection 

9 (b)(1)(H)(iii) or (b)(3) of section 172 of such 

10 Code with respect to such loss may (notwith11 standing such section) be revoked before the 

12 due date (including extension of time) for filing 

13 the return for the taxpayer’s last taxable year 

14 beginning during 2011, and 

15 (B) any application under section 6411(a) 

16 of such Code with respect to such loss shall be 

17 treated as timely filed if filed before such due 

18 date. 

19 SEC. 4. HARDSHIP WITHDRAWALS. 

20 (a) IN GENERAL.—Paragraph (2) of section 72(t) of 

21 the Internal Revenue Code of 1986 is amended by adding 

22 at the end the following new subparagraph: 

23 ‘‘(H) DISTRIBUTIONS TO REPLACE QUALI24 FIED FRAUDULENT INVESTMENT LOSSES.—Any 

25 distribution which was made during the 10-year 


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1 period beginning on the date on which a quali2 fied fraudulent investment loss (as defined in 

3 section 165(m)(3)) was discovered to the extent 

4 the aggregate of such distributions do not ex5 ceed such qualified fraudulent investment 

6 loss.’’. 

7 (b) EFFECTIVE DATE.—The amendment made by 

8 this section shall apply to taxable years beginning after 

9 December 31, 2007. 

10 SEC. 5. CATCH-UP CONTRIBUTIONS. 

11 (a) IN GENERAL.—Section 219(b)(5) of the Internal 

12 Revenue Code of 1986 is amended by redesignating sub13 paragraphs (C) and (D) as subparagraphs (D) and (E), 

14 respectively, and by inserting after subparagraph (B) the 

15 following new subparagraph: 

16 ‘‘(C) CATCHUP CONTRIBUTIONS RELATING

17 TO QUALIFIED FRAUDULENT INVESTMENT

18 LOSSES.— 

19 ‘‘(i) IN GENERAL.—In the case of any 

20 applicable individual who elects to make a 

21 qualified retirement contribution in addi22 tion to the amount determined under sub23 paragraph (A), the deductible amount for 

24 any taxable year shall be increased by an 

25 amount equal to the lesser of— 


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1 ‘‘(I) 100 percent of the amount 

2 determined under subparagraph (A) 

3 for such taxable year, or 

4 ‘‘(II) the excess of the qualified 

5 fraudulent investment loss described 

6 in clause (ii) over the amount of con7 tributions allowed as a deduction by 

8 reason of this subparagraph for all 

9 preceding taxable years. 

10 ‘‘(ii) APPLICABLE INDIVIDUAL.—For 

11 purposes of this subparagraph, the term 

12 ‘applicable individual’ means, with respect 

13 to any taxable year, any individual with a 

14 qualified fraudulent investment loss (as de15 fined in section 165(m)(3)) in an indi16 vidual retirement plan in any of the 10 im17 mediately preceding taxable years if the 

18 amount of such loss exceeded 50 percent of 

19 the value of such individual retirement 

20 plan on the day immediately preceding the 

21 discovery of the qualified fraudulent invest22 ment loss.’’. 

23 (b) EFFECTIVE DATE.—The amendments made by 

24 this section shall apply to taxable years beginning after 

25 December 31, 2007. 


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1 SEC. 6. EXTENSION OF LIMITATION FOR CREDITS AND RE2 FUNDS FOR GIFTS AND BEQUESTS OF ASSETS 

3 WITH QUALIFIED FRAUDULENT INVESTMENT 

4 LOSSES. 

5 (a) IN GENERAL.—Section 6511 of the Internal Rev6 enue Code of 1986 is amended by redesignating subsection 

7 (i) as subsection (j) and by inserting after subsection (h) 

8 the following new subsection: 

9 ‘‘(i) SPECIAL RULES APPLICABLE TO ESTATE AND

10 GIFT TAXES WITH RESPECT TO ASSETS WITH QUALI11 FIED FRAUDULENT INVESTMENT LOSSES.— 

12 ‘‘(1) IN GENERAL.—If a claim for a credit or 

13 refund relates to an overpayment of taxes imposed 

14 under subtitle B in connection with a gift or bequest 

15 of an interest in an investment with respect to which 

16 there is a qualified fraudulent investment loss (as 

17 defined in section 165(m)(3)) and the taxpayer did 

18 not know, and reasonably should not have known, 

19 about the criminal behavior in connection with such 

20 loss, such credit or refund may be allowed or made 

21 if claim therefor is filed on or before the date that 

22 is 6 years after the return to which the credit or 

23 overpayment relates was filed. 

24 ‘‘(2) DETERMINATION OF VALUE.— 

25 ‘‘(A) GIFT TAXES.—In determining the 

26 amount of any credit or refund described in 


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1 paragraph (1) relating to a gift, the value of 

2 such gift shall be not more than the greater of 

3 the value of such gift on the last day of the tax4 able year in which the qualified fraudulent in5 vestment loss was discovered or the amount re6 alized from the disposition of such gift (if any) 

7 by the donee. 

8 ‘‘(B) ESTATE TAXES.—In determining the 

9 amount of any credit or refund described in 

10 paragraph (1) relating to a bequest, the value 

11 of such bequest shall be not more than the 

12 greater of the value of such bequest on the last 

13 day of the calendar year in which the qualified 

14 fraudulent investment loss was discovered or 

15 the amount realized from the disposition of 

16 such bequest (if any) by the donee.’’. 

17 (b) EFFECTIVE DATE.—The amendments made by 

18 this section shall apply to gifts or bequests made after De19 cember 31, 2007. 

20 SEC. 7. WAIVER OF LIMITATION FOR CREDITS AND RE21 FUNDS ATTRIBUTABLE TO THIS ACT. 

22 If the credit or refund of any overpayment of tax re23 sulting from the application of the amendments made by 

24 sections 1 through 5 of this Act to a period before the 

25 date of enactment of this Act is prevented as of such date 


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1 by the operation of any law or rule of law (including res 

2 judicata), such credit or refund may nevertheless be al3 lowed or made if the claim therefor is filed before the close 

4 of the 1-year period beginning on the date of the enact5 ment of this Act. 

Æ 


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